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Employee theft and embezzlement can happen in any business. However, it hits smaller businesses in larger numbers, in part because too often owners don’t have the right checks and balances in place.

The following are five tips that can help you greatly reduce the chance that you are victimized.

1. Know that it can happen to you.

If we’ve heard it once, we’ve heard it a thousand times: “I trust my bookkeeper.” Almost every case of embezzlement in small businesses involves a person who is trusted, taking money from an unsuspecting business owner.

We’ve seen a lifelong best friend steal from her business partner. We’ve seen a man take money from his siblings. We even know of a CPA who embezzled from his client.

Honest, hardworking entrepreneurs have been taken for tens and hundreds of thousands of dollars. The owner’s mistake: they trusted too much. When you think it can’t happen to you, your business is the most susceptible.

As Ronald Regan said, “Trust, but verify.”

Many business owners don’t want to put financial controls in place because they are afraid of making their bookkeeper feel distrusted. That logic is flawed. An honest bookkeeper would want checks and balances so that there could never be a question about his or her veracity. In fact, the bookkeepers we have seen complain the most about not being trusted are the ones who were later found to have been stealing from the company.

Further, it’s fundamentally unfair to your bookkeeper to give him or her unfettered access. At some point he or she is going to face financial difficulties -- almost all of us do. Why tempt a person when he or she is most vulnerable by giving him or her uncontrolled access to your checkbook?

2. Run all receipts and disbursements through a checking account.

Put any money that comes into the business into a checking account. Take any money that leaves the businesses out of a checking account. This provides a record of receipts and disbursements that cannot be tampered with because it’s controlled by the bank.

Bookkeepers can put false entries into financial statements, but they can’t manipulate cash in the bank. Everything should be reconciled to the checking account. The reconciliation should happen monthly and the owner should review it in a timely manner. It only takes a few minutes.

3. Create separation of duties.

We advise that the same employee not set up a vendor, approve a payment and write the check. It’s better to have two people involved when money leaves the business. In the same way, one employee should not set up an employee on the payroll system and cause a paycheck to be cut.

One bookkeeper, who is now living at the expense of the federal government, set up a fake employee to funnel money into her own account.

4. Review statements.

The owner should periodically and unpredictably review bank statements, credit card statements and statements from the payroll company showing what each employee was paid. This should include looking at cancelled checks.

After years of blind trust, one business owner finally reviewed a bank statement and found that her trusted bookkeeper was making cash withdrawals from ATMs, writing checks to himself and using his company debit card to purchase personal items such as groceries.

5. Audit the books.

Periodically, have an unrelated third party review your books and accounts. This doesn’t have to be a comprehensive audit of every transaction -- spot checks will do. The cost is minimal and the deterrent can save you thousands.

Employee theft and embezzlement is a massive problem. Statistics reveal that it results in one-third of all small-business failures. Set up the simple financial controls necessary to prevent it. Don’t let your business become yet another statistic.

Doug and Polly White

Doug and Polly White own Whitestone Partners Inc., a management-consulting firm that specializes in helping small businesses grow profitably. They are also co-authors of Let Go to GROW, a bestselling book on why some businesses thrive and o...